Q2 2020 Bank7 Corp Earnings Call
Second quarter earnings call.
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Please note this event is being recorded.
Before we get started I'd like to highlight the legal information and disclaimer on page 25, the investor presentation.
For those who do not have access to the Chris patient management, that's going to discuss certain topics that contain forward looking information, which is based on management's beliefs as well it assumptions made by and information currently available to management.
Although management believes that the expectations reflected in such forward looking statements are reasonable they can give no assurance that such expectations will prove to be correct.
Such statements are subject to certain risks uncertainties and assumptions, including among other things that direct and indirect effect of economic conditions on interest rates credit quality loan demand liquidity and monetary against supervisory policies a bank regulators.
Should one or more of these risks materialize or should underlying assumptions prove incorrect actual results may vary materially from does expect it.
Also please note that this conference call contains references to non-GAAP financial measures you can find reconciliations of these non-GAAP financial measures to GAAP financial measures and an 8-K. It was filed this morning by the company.
Representing the company on today's call, we have Brad Haynes, Chairman, Tom Travis President and CEO, Jay to Philips, Chief operating Officer, Jason Estes.
Chief Credit Officer, Kelly Harris, Chief Financial Officer.
With that I'll turn the conference over to Tom Travis.
Thank you good afternoon, and thank you for joining US today. We appreciate your interest that involvement with our team at our Great company.
Thanks considered we're pleased with our second quarter results, especially our strong PPV a great strength of our company.
Reflecting back on the April call, we understood we were facing many unknowns and while much has changed between then and now certainly we've seen some things materialized yet many unknowns remain.
In addition, we've witnessed new sources of social unrest, that's unrelated to the pandemic in that two has contributed to greater volatility, creating less certainty about the future something none of us really needed.
With all that said, we do see green shoots beginning to emerge and we recognize the benefits provided by the Fed Congress. The Treasury Department and also from the executive branch of governments not to mention the progress being made by the scientist in the doctors.
During these times of extreme volatility is reassuring to see the bank 17, performing at such a high level. They are to be congratulated for their tireless work and outstanding performance. It is truly a privilege to work the professional exceptional people it'd be parts such an outstanding company.
The industry faces heightened risk, including credit risk margin pressure stress to our customers and team members additional threats related I T intrusions and Cybercrimes.
Regardless worked closely managing those risks and remain very focused on our credit book, our liquidity and capital levels and certainly our expense discipline an internal operations.
The volatile environment caused us to closely reviewing a refresh our extreme stress scenarios and we're using those results in conjunction with our deep transactional knowledge to assess potential impacts to our company. We're comforted by the thorough involvement between our experience credit executives who worked direct.
Early with lenders and our customers.
Our enhanced stressed scenario is based on the most recent fed guidance, then compared to actual results that occurred and the great recession, which is then balance where the view towards our incurred loss methodology. The result is a high degree of confidence in our revenue stream and the shock absorption capability of earnings in capital.
That is why we also expect to continue to pay our dividend.
Moving into the data we focus on our strong pp E. As it was once again very high and consistent with historical levels. The data illustrates two very important items. The first shows our significant capital cushion and the second reveals how RPP. He is much stronger than our peers, we're very proud of our strength in this area.
Yes.
With regard to capital we entered into this period of uncertainty with a very strong capital base.
Additionally, not only did we enter the current prices was strong capital position, our exceptional earnings will rapidly add to our capital base and much faster than most other banks, we're very mindful that the near term future is full of uncertainty. Nonetheless, we remain confident in our capital strength, our confidence as further evidenced by.
The fact that none of the shares owned bar insiders have been sold not one share we have far more it's taken this company than anyone else.
Regarding credit quality, we're mostly in uncharted waters, and we realize this pandemic as far reaching a different nonetheless, we remain confident that asset quality remained relatively strong as our underwriting principles and longtime customer relationship have always karidis through the toughest at times, our strategy of loaning into more of the.
Blue collar types of projects in segments will service well, we can especially see that by reviewing the data related to the hospitality hospitality and CRT segments.
Experience has taught us that economic downturns typically hit the more leverage and higher in segments, especially hard. We also know that past recessions ever deal the strength in what we call the cycle down segments of the economy, we're very confident in our loan book being mindful of the heightened scrutiny surrounding credit quality we provide.
Got it enhanced reporting for our energy hospitality and CRT segments, and we'll ask Jason SSR, Chief Credit officer to walk us through the credit book.
Thanks, Tom as mentioned visibility is improving on the impact of the pandemic on the economy and our loan portfolio.
This event as quickly created a stress to the hospitality industry that had been performing at a high level since the great recession.
The energy industry vote was we're already present, but were compounded by the sudden collapse in demand as a result, we've seen downward migration within the portfolio. Our npis in substandard loans have increased and we've increased our provision after the extended period of low provision and low charge off activity.
While charge offs remain low.
It's important to recognize that our client base has been help significant government stimulus.
The energy portfolio continue to see stress with the service the midstream company feeling the impact the most.
Most of the service companies or in some stage of shrinking are winding completely down with the majority positioning to sell assets already well into the process of selling off excess equipment that just won't be needed in the near future now a couple of positive notes, our E and p. and mineral clients continue to perform at a high level.
So with minimal payment modification activity today, so far the challenging deals. We've navigated have had positive in results with asset sales and account receivable reductions eliminating or reducing debt levels to a point, where the remaining operation can service what's left of the debt.
Now as seen in the slide deck 22 of our 34 operating hotels have returned or will return in August two original monthly payment schedule.
This rebound is driven by the blue Blue collar property set.
It's also worth mentioning that are minimal exposure to retail land and non owner occupied office real estate is serving us well and will continue to do so in the future.
Overall, our high levels of capital and commitment to executive management involvement at the transaction level gives me great confidence in our ability to navigate this challenging economic environment and with that I'll turn it back over to Tom Thanks, Jess and that's a good report on the credit side of bank. Thank you for your hard work.
We move forward our focus will continue to be on fundamentals will continue to produce very strong pp, he and reinforce our capital wrapping up we would say that were also comforted by the fact that are part of the country continues to outperform to many other areas and we know the green shoots we're seeing are important because there are flows of capital seek.
In opportunity and that is a very good sign so we intend to be vigilant pay close attention to smart opportunities being nimble yet large enough to capitalize on those opportunities is critical to our near term future and we're very focused on that aspect. So we thank you for your time and we're here to field any questions you might have.
Thank you we will now begin the question and answer session.
To ask a question do you May Press Star then one on your telephone keypad, if you're using a speakerphone. Please pick up your handset before pressing the keys to withdraw your question. Please press Star then to.
At this time, we'll pause momentarily to assemble our roster.
And the first question will come from Brady Gailey with KBW. Please go ahead.
Hey, Thanks, good afternoon guys.
Okay.
Well, what do we start with loan growth.
If you.
Hey, how the PPP balances I think loans were down a little bit.
Maybe just talk about the drivers there and how you're thinking at all of loan growth for the back half of this year in India and snacks.
I would say that remember we entered into if you go back to November December of last year, we were extremely excited about our loan pipeline.
And in fact in January and February we had some very good loan fundings and that pipeline was beginning to fund and so it propelled us to a very large increase in our loan portfolio at the end of the first quarter and then as we all know I would suggest to you that thing came to a screeching halt around that birth.
Your second week of March and that certainly had an impact on the funding of the rest of that pipeline and so where we are without PPP at the end of the quarter with about 775 million correct.
And suffice it to say that.
There are many most people that are really not interested of borrowing money right. Now. However, the reason that we wanted to comment on the green shoots and specifically related to taxes there is a.
Very even more migration into Texas and business owners and so those green shoots that we're seeing are going to propel us forward I don't think you're going to see.
Any meaningful loan growth for the back half of this year.
But having said that we actually have opportunities right now and so it's hard to handicap, but I would say that that you would probably expect us to be pretty flat through the rest of the year part of that has also driven by the main Street program and as you know the.
Existing lender has certain limitations that a new lender may not and so it's possible that we could see a few credits.
Refinanced out of the bank.
Through the main street program with other lenders.
Puts further pressure on the portfolio.
Okay.
Alright, Thats got some good color.
So next we talk about.
For roles and just where those are today, maybe talk about.
Yes, the need for any second grapple with deferrals and what's your anticipate that need to be.
Let's let Jason do that but quickly Brady on your your piece that came out. This morning. Thank you for that one comment I would make it to settle thing, but it's a major thing I think you had mentioned in your pace that 22 out of our 43 properties were back on schedule and you really need to back out Theres nine of those 43.
Read that are construction under construction and never really were on a operational per.
Condition and so therefore I think the number is 22 out of 34 operating properties. So with that being said, we'll turn it over to Jason.
Yes, so the covered mod.
Temporary modifications remember, we stuck to 60 and 90 day modifications in the in the first around with the majority of those being execute Kid in late late late March and through early April and so at the end of June.
10% of our note and 37% of our loan balances and.
Today, well as of the 24th we were down to 87 notes.
Which would be I don't have the percentage here, but it's.
When is that I'll do the math on that second by another 100 million that was deferred.
Has come back on the normal payment. So we've got it from 313 million on deferrals to $203 million on deferrals.
And there is another big chunk that falls off in the next 30 days and you'll be down to just a handful that have had an additional deferral.
Past that original deferral.
Alright, Alright, Thats helpful. And then finally from me as we look at the provision.
How do you expect that to trend in the back half a year I know you guys or not.
Cecil adopters yet the reserve was built some this quarter, but how do you anticipate the reserve Youre continuing to go higher in the back half there.
Yes, it wouldn't surprise us I think the intention right now.
Is subject to change is it's a it's a rapidly changing thing but.
It wouldn't surprise to see it build slightly.
And I think the the clarity for all of US is going to be more and more over the next four to eight weeks, maybe 12 weeks with medicine in science and the things that they are doing and the wearing masks seems to be pretty prevalent throughout the country and that appears to be helping plateau and so.
I think that the last piece of that Brady is going to be the the next stimulus package, everyone expects the stimulus package and so so at this point in time, we're very comfortable with our loan loss reserve and but yet we're not.
We're not living a dream down here, we understand the unknowns in so I would say to you that we finished it what we had 128 or so 120 728 and remember our view as you know we've got such strong PE that we're just move and money from one park into the other and.
And so if we need to I think I think the number I calculated with somewhere around a million and a half more dollars would get us up to one of the half percent, which is pretty healthy. If you consider the last thing I would say is we don't have consumer loan exposure and we have wanted to have percent of our loan we don't have credit cards and if you go look.
At the components.
Especially chase and the big guys.
I think their largest last component if not number one number two is the consumer book and so if you don't have that consumer book and then you try to balance that with where we are with our loan loss reserve in our history of charge offs in our underwriting we just don't see a great urgent need to throw a bunch of.
In there and I think you'll see us be consistent over the next quarter to quarter, but wouldn't surprise me. If it went up a little bit no wouldn't surprise me. If it was flat no. So we're close to where we think we need to be subject to all those things I've mentioned relative to what will no in the next three months.
Got it thanks for the color guys.
Your next question comes from Nathan race with Piper Sandler. Please go ahead.
Yes, hi, good afternoon.
Hello.
Just going back to the last question just in terms of thinking about the reserve build going forward I was curious maybe within the context that being kind of elaborate on what criticized and classified trends. We're in the quarter in how you see that evolving over the next quarter too.
Yes, so the watch lists grew.
Our special mentioned lists grew slightly and then our sub standard set of loans also grew.
All of them are within some historical bands for us within the last five years, but there's certainly been some downward migration and you can see in that in the NPPA that that number was up from last quarter. We did have some nice stories within that number where we had some reductions in.
Already identified Npis.
Actually how to pay off in there and then some continued amortization, but then we added.
Q.
Credits to that drew so.
We'll see we'll see moving forward, but that's kind of how it how it went this past quarter.
I would say there can you just from a macro from a macro perspective. When you look at the allowance you look at the migration of into phase and the credit book in the grading.
It's very very difficult to two.
To draw any conclusions because you need to do it based on a perspective and a belief of whatever this new normal is going to be and Great example, lot by what do we have five SPT loans in the company I don't even know.
Seven and so you may have borrowers like we have.
Borrowers the veterinarian and you know that operation was hit pretty hard and just like a lot of others are chiropractors. Another example, and and and so the SBK decided.
Without anyone asking what they're going to step in and make six monthly payments for you. So if you're running at organization and you say well. These people are not no one's going to the to the chiropractor today and so does that make that person substandard credit.
Does it make them a something beyond a watch list and so my point is that.
We've done this for a long long time and you you grade credits based on what you think is a reasonable outlook and where you are today and what I'm, suggesting to you. That's a very difficult thing to do and and so what we have to do is we have to be patient and we have to know that the.
Capital is there if we ever need it, but we need to wait and determine a more permanent effect on certain segments in certain asset classes and then I think you can draw conclusions, but I would say one more thing about deferments I know for a fact.
So two banks for certain.
That they have lower deferments, but guess, what they're making side notes to borrowers. So the borrower comes then they get a side note. They can draw proceeds off that note. So that they don't have a deferment now you may think thats gamesmanship or whatever and but my point is there is no standard there are no standard Anders that had been published.
And so while I certainly appreciate the difficulty of an analyst job I don't want to draw any conclusions, we don't want to draw conclusions for our company and make permanent decisions today based on what we consider to still be a temporary situation relative to the grading of the credit.
It's now unless it's a certain thing unless you I mean, if we were if we were had a long to a drilling contractors secured by drilling rigs and then yes, we think thats going to be a very very long term thing, but but absent the view obvious ones.
Then then that's going to be our perspective, and so we're not worried about this new metric. That's all the sudden appeared there were people are comparing deferments compared from bank of bank debate because there just is no standardization, there and and again, we know you havent job to do but.
It's very difficult to.
Make projections at this point.
Yes, I understand bullets obsolete and evolving world So definitely.
Appreciate.
Comments Tom.
So I guess at this point I mean, you guys aren't really reserving freight specific credits and.
Some additional general reserve builds over the next quarter to that kind of a fair calculate characterization I suppose if those comments.
We do have some specific reserves, we have credits that have some specific reserves yes.
And does that.
Factor in the.
Yes, but the small uptick that we saw an empty.
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This current quarter.
I would say, it's a combination of both but it's skewed less towards specific reserves and more towards just macro events in trying to understand that we're facing unknowns and we think that the peak or the severity that's going to hit certain asset classes won't be fully known until the last of the stimulus.
As packages run out now we can see some emerging like we talked about broadened our at lunch today talking about the airline industry and I think we all would agree for for the near future. There's got to be too many airplanes out there. So we're not an airplane lender, but it's so there are certain asset classes that you can make that determination on.
But I think that those really won't be fully known until later in the year.
Okay understood.
All right I'll step back for now thank you.
Once again, if you'd like to ask a question. Please press Star then one.
The next question will come from Matt Olney Stephens. Please go ahead.
Yes, thanks for taking my question.
Turning to add more about the midstream energy portfolio and it sounds like your views.
Of your portfolio are evolving when I think it that's category I think of pipeline, but it sounds like this may not be exactly the business that you classify under under midstream. So can you tell us more about how your views of your portfolio are evolving in from midstream energy and and.
If you can't be little more specific about what types of businesses. These dollars that they're not pipelines.
Sure there pipeline service companies pipeline construction companies, mostly environmentally driven and so going in you know back in April we thought okay. Maybe a couple of weeks two a month here theyre disrupted it's been larger than that as these giant midstream companies.
Have delayed projects into the future that these guys were either constructed this service or build.
And so some of it like I say is environmentally driven and so they only have a certain amount of time that they can delay getting this work done but the fact is in the second quarter. They saw really a quick deterioration in the in the pipeline for them and so that's why you see that shift.
Within that that she'd I'm sure you're referring to the slide deck.
Thats, where this question coming from but anyway. So thats just what's happened in the last 90 days to our view of of those companies.
And really I would say I was somewhat surprised that the severity of the of the revenue slump for them and really the the very short term outlook for those companies.
Jason are those jobs.
The job and already started once the pandemic hit.
Most of those jobs got pushed.
Either from.
Either from the big companies just correct.
Along with everybody else, but.
Some of them are now coming back on the table games are looking up a little bit so probably all eyes on the election right now.
And based on this slide deck, none of those midstream borrowers have have modified.
Loan terms I was little surprised about that help me reconcile.
The increase concern, but but no no modify loan balances.
Sure Triple P. proceeds.
You've had to.
Government assistance on some of this stuff, but that doesn't change our overall view.
Of these credits in the business environment, but they have not needed any payment health.
Got payment relief.
Okay. That's helpful and then on the hospitality side I think you disclose that the average occupancy for those 22 properties that are returning to normal payment status here pretty quickly was around 63% in June so for the remaining 12 properties is that still require additional payment really.
What's the occupancy and that part of the book and then kind of part to what common themes are you seeing and as you look at those 22 properties for Tony known wants that first of the 12 in any other themes that you can think could you can share with us between that that portfolio.
Definitely.
So of the 12 remaining to have decided that they're just going to temporarily closed until conditions improve so there's really 10 other.
That have been open and operating and their occupancy in June was 29%.
And I think the thing that will stand out as you.
You are going to be looking at higher end closer to downtown more dependent upon business travel in that segment that's lagging.
Versus interstate properties that have little reliance on.
Business Theyre going to be people that are traveling getting from 0.8 appoint be need to place to stop unrest or leisure travelers.
And that's been a steady you know I know I put the June number in there, but if you go back and you look at March April May June you're going to see this very steady increase in occupancy and HDR amongst really both property sets, but the one is recovering faster than the other.
But it is worth noting the 10 other operating properties.
They're March occupancy was 19% and so now they are at 29. So there is some level of rebound. It's just not the same pace has those others.
Okay. That's that's helpful. And then if I switch gears over to the margin the margin adjusted for loan fees I believe was around 430 into Q.
How do you see that margin playing out for the back half the year.
I think you're going to see us operating the low end of our historical range.
We're fighting very hard to to keep it where it is an all banks arent.
Part of the issue is the fed.
We're proud of our liquidity, but.
We we had a board meeting the other day I think we had $100 million on deposit the fed we made a whopping $7000 an income off that one month.
And so.
I think it's really a function of of its a confluence of the banks being smart and cautious and prudent and keep on our liquidity up at a time, where keeping your liquidity up cost your pressure on your margin and so so we're going to do some things were going to whittle here and there we already have.
So it has just as much to do that as it does borrowers coming in and demanding or our borrowing at a better rate and I would say are we still at 90% plus our low force 94, yes. So so we're insulated and.
And I think some borrowers chip away at you and.
And but we're comfortable operating in that historical range, albeit at the lower end then it's again, it's mainly on the liability side of the balance sheet in our inability to drive.
Interest income off of our strong liquidity.
Okay. Good.
And then on the operating expense side saw somewhat good cost control this quarter I think.
Were down sequentially.
Do you still think you can hold expenses down this lower level and what's the outlook for the back half the year.
You know we're focused on that every day and we've created a high class problem for ourselves.
And.
It's tough to answer that question, because you get to a point, where your efficiency ratio at 35% it's.
I can't wait for the quarter, where it goes from 35 to 37 at all the settlement to panic, but we're still better than I am an 8% of the people out there. So so you're caught a splitting hairs of just say that we haven't changed our outlook at our perspective, one bit as far as watch in our case.
Yes. These times that efficiency ratio really really rises to the Tom.
Right.
Yeah, we're we've got enough to do we all do.
But the one thing we won't have to worry about it as Graham around trying to figure out how to get more efficient.
Yes below 34% definitely a impressive especially versus pretty much all your peers out there. So that's that's great to see.
What about on the the buyback side at the stock you got plenty of capital great great profitability.
Is there any activity into Q and what are the updated thoughts on the buyback from here.
Yes, I would say the.
Well Kelly the period between the second week of March in about mid April we bought back about 830000 shares.
5000 in Q2, 85000 of which was in Q2, and so we decided to take a pause and we're not saying that we wouldn't come back into the market, but theres a lot of considerations. There. It's not just price, it's not just dps, its float and liquidity and and so.
We're very careful with our capital low levels in our PE and and.
I would say it would be hard for back seven to sit on it has at the stock took a big dive and we've got that Optionality, but we're very comfortable where we are and we think we've done the right thing for our investors and.
And so.
We'll see where it goes from here.
Okay, Great. That's all from me. Thank you.
Thank you.
Ladies and gentlemen, this concludes our question and answer session I would like to turn the conference back over to Tom Travis for any closing remarks.
Thank you all for your interest in the company we.
We havent food, yes, we have we love the markets we operate in and.
Well certainly there stress here the other by underlying fundamentals of inward migration is just unfortunately, I guess you can say the thus the strife in the writing that you see in certain parts of the country and believe me the people that are moving into especially the Texas market is it just continues.
And you have low interest rates and you have this can do attitude and inward migration and that's a pretty powerful formula and so so we don't want to sound Gideon we don't want to sound overly optimistic because we do think we're going to have a few credit issues you cannot escaped them, but the reason we put for the first time.
The stress test that Kelly adjacent worked on very hard and we decided to follow the de fast methodology. So that all of you can see the results. We just feel really good about where we are in who we are and so we're.
We're comfortable with with our company and I guess I would ask chairman Haynes that he had any other comments.
I believe thats it.
We have a great team.
Team all buys into how we do things and we're going to continue to do so thank you very much guys. Thanks. Thank you.
The conference has now concluded thanks attending today's presentation you may now disconnect.
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